Retirement planning is a way to ensure that you can generate an income that supports the kind of lifestyle you lead in later life, whatever that looks like.

While your pension is likely to provide the foundation of your income during retirement, fears about inflation and volatile markets are encouraging people to look for alternatives, and you may be considering property. If so, you’re not alone.

According to FTAdviser, 25% of savers plan to invest in property as an alternative way of generating income in retirement. You often see news stories about record-breaking house prices so many people see property as a viable investment, and you can also potentially generate income by renting it out.

However, there are certain additional costs and tax implications associated with property that you need to be aware of. It is important to consider your personal retirement goals to determine which option is best for you.

Read on to learn the potential benefits and downsides of investing in property.

Property prices increased 6.3% in the year to January 2023

According to MoneyAge, the total value of UK housing stock hit a record high of £8.68 trillion at the end of 2022. Naturally, you may be interested in property because it’s more valuable than ever and historically, prices have increased.

Data from the Office for National Statistics (ONS) shows that house prices rose an average of 6.3% in the 12 months to January 2023. While past performance can’t tell us what the future holds, this is a healthy annual return and, if you invest your money in property, you benefit from the potential for capital growth.

Equally, of course, property prices could fall and your investment could lose value. As the ONS report, on a seasonally-adjusted basis, the average UK house price decreased by 0.6% in January 2023, following a decrease of 0.4% in December 2022.

One of the other issues with property is that it is generally a less liquid asset than cash or savings. It’s usually relatively easy to access funds tied up in savings accounts, funds or shares, whereas you may have to either sell a property or borrow against it to raise capital – both of which can take weeks or months to conclude.

Buy-to-let properties cost an average of £3,134 a year to maintain

The income generated by renting out property is often the thing people point to when considering it as a retirement strategy. Demand for rental homes has historically remained strong and, as such, you may be able to earn a healthy income with a buy-to-let property.

According to Property Data, the average rental yield in the UK – your annual rental income divided by the total value of the property – is 4.75%. But in some areas, it can be much higher than this. For example, the NG7 area of Nottingham has the best returns in the UK with average rental yields of 11.3%.

While the rent may generate an income for you, the maintenance costs associated with buy-to-let investments could negate some of this.

A study from LV= found that landlords spend an average of £3,134 a year on their buy-to-let properties.

If you don’t have a tenant in the property – commonly called a “void period” – you may have to absorb these costs yourself as you won’t have rent payments to cover them.

Additionally, borrowing to purchase a buy-to-let property can be more expensive than borrowing to buy your own home. According to Money Helper, buy-to-let mortgages usually have higher fees and interest rates, and often require a minimum deposit of 25% of the property’s value. So, you will likely need a larger lump sum to invest in property.

There may also be additional costs including:

• Stamp Duty Land Tax (if the property costs £40,000 or more) in England and Northern Ireland – this includes an additional 3% on top of the normal rate because it is a second home. There are similar taxes in Wales and Scotland
• Estate agent, solicitor, and conveyancing fees
• Insurance
• Refurbishment costs.

You may need to factor these costs in when deciding if property is a suitable way to fund your retirement.

Property may be less tax-efficient than other options

Tax efficiency is an important part of retirement planning. If you can find ways to reduce your tax burden, that ultimately means you keep more of your savings or income, it may be easier to achieve the lifestyle you want in retirement. It may also mean you can pass more of your wealth on to your family.

If you own property outside a limited company, you are normally liable to pay Income Tax on rental profits, and if you sell the property, you could pay Capital Gains Tax (CGT) on any value growth.

Property, whether it is your home or a buy-to-let investment, is also normally considered part of your estate for Inheritance Tax (IHT) purposes. If the total value of your estate, including any properties, is above the IHT nil-rate bands, your family may be liable to pay IHT.

Get in touch

If you want to explore your options for generating an income in retirement, get in touch and we can advise you.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.